Statutory reserves and liquidation proceeds: profits stayed accumulated, while capital gains applied only under the later charging provision.

Amounts appropriated to statutory reserves remained accumulated profits because they were made out of profits, were not capitalised, and were not transferred to any separate fund vesting in a third party; the company's profit for the year ending 31 March 1956 was treated on the same footing, and the accumulated-profits finding went against the assessee. Distribution of liquidation proceeds was not assessable as capital gains for assessment years 1960-61 and 1961-62, because section 12B of the 1922 Act required a sale, exchange, relinquishment or transfer, which liquidation distribution did not involve. For 1962-63, section 46(2) of the 1961 Act applied as an express charging provision, so the distribution was liable to capital gains tax for that year.

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Issues: (i) Whether the sums transferred to statutory reserves and the profit for the year ending 31 March 1956 formed part of the company's accumulated profits for the purpose of section 2(6A)(c) of the Income-tax Act, 1922. (ii) Whether any portion of the amount distributed by the liquidator to shareholders was liable to be assessed as capital gains for the assessment years 1960-61, 1961-62 and 1962-63.

Issue (i): Whether the sums transferred to statutory reserves and the profit for the year ending 31 March 1956 formed part of the company's accumulated profits for the purpose of section 2(6A)(c) of the Income-tax Act, 1922.

Analysis: The amounts standing to the credit of the three reserves were appropriations made out of the company's profits. They retained their character as profits notwithstanding that they were statutorily required to be maintained and ultimately handed over to the purchaser of the undertaking. The moneys were not capitalised and had not been transferred to any separate fund vesting in a third party. Mere statutory restrictions on user did not alter their character as profits available for accumulation. The profit for the relevant year stood on the same footing.

Conclusion: Yes. The sum of Rs. 4,35,525 formed part of the accumulated profits and the finding is against the assessee.

Issue (ii): Whether any portion of the amount distributed by the liquidator to shareholders was liable to be assessed as capital gains for the assessment years 1960-61, 1961-62 and 1962-63.

Analysis: For the assessment years 1960-61 and 1961-62, the charge could arise only under section 12B of the Indian Income-tax Act, 1922, and distribution of assets in liquidation did not involve a sale, exchange, relinquishment or transfer so as to attract that provision. For the assessment year 1962-63, section 46(2) of the Income-tax Act, 1961 was an express charging provision covering money or assets received by a shareholder on liquidation and therefore governed that year.

Conclusion: No portion of the distribution was assessable as capital gains for the assessment years 1960-61 and 1961-62, but the distribution was liable to be assessed as capital gains for the assessment year 1962-63.

Final Conclusion: The reference was answered partly against the assessee on the accumulated-profits question, while the capital-gains issue was decided in the assessee's favour for two assessment years and against him for the third, with computation of capital gains for 1962-63 left to be worked out in accordance with law.

Ratio Decidendi: Amounts appropriated to statutory reserves remain accumulated profits unless they are capitalised, and distribution of liquidation proceeds is not taxable as capital gains under the 1922 Act absent a transfer, though a specific charging provision under the 1961 Act can apply for the relevant later year.

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